Chapter 3. Impact of trade facilitation and paperless trade on trade costs
3.3. Conclusion
Using the new data from the survey, as detailed in chapter 2, together with the latest available data from the ESCAP-World Bank Trade Cost Database, this chapter investigates the impact of implementing trade facilitation measures on trade costs. This not only includes many of those featured in the WTO TFA but also more advanced paperless trade measures outside the scope of the WTO TFA. The econometric analysis shows that a 10% increase in the implementation of the comprehensive set of trade facilitation measures considered is associated with a 2.8% decrease in trade costs. A more disaggregated analysis, whereby trade facilitation measures are categorized into four categories (transparency, formalities, institutional arrangement and cooperation, and paperless trade) suggests that implementation of paperless trade and formalities measures have the greatest impact on reducing trade costs.
A counterfactual analysis conducted to simulate the impact of various trade facilitation implementation scenarios on Asia-Pacific countries revealed the following: (a) partial (full) implementation of binding and non-binding measures included in the WTO TFA is associated with an average 5% (10.5%) trade cost reduction in Asia-Pacific; (b) intraregional trade costs reductions are also significant but lower than those likely to be experienced by Asia and Pacific region countries extraregionally; (c) paperless trade measures have the highest impact on trade costs among all types of trade facilitation measures considered followed by formalities measures; and (d) country-specific reductions vary from zero per cent to more than 30%, depending on the current state of implementation of trade facilitation in each country.
The estimated impact of a full implementation of the WTO TFA is associated with an 8.62% decrease in intraregional trade costs in the Asia-Pacific region and an 11.11% decrease in international trade costs between the Asia-Pacific region and the world. In comparison, full implementation of the WTO TFA is associated with a reduction in world trade costs of 14.3%, according to the latest World Trade Report (WTO 2015b).50 The reduction estimate for Asia in the World Trade Report is just below 14%. Our lower estimates may be explained by the fact that our analysis considered a wider range of other trade facilitation measures and factors besides the WTO TFA. Indeed, the results confirmed the prime importance of maritime connectivity in reducing trade costs and highlighted the need for WTO TFA implementation to take place as part of a comprehensive approach to reducing trade costs.
Overall, our estimates still suggest that trade costs savings for Asia and the Pacific from even partial implementation of both binding and non-binding WTO TFA measures could reach at least USD 263 billion a year.51 That said, developing countries that have long been involved in simplifying, harmonizing, and automating trade procedures at the national and (sub)regional level may experience relatively small trade cost reductions from WTO TFA given their already advanced
50 Estimates are based on Moisé and Sorescu, 2013.
51 - and up to USD 640 billion a year if full implementation of a WTO TFA+ package of measures can be achieved.
63 level of trade facilitation. Further facilitation of trade in these economies will involve developing legal and technical frameworks to support cross-border paperless trade, i.e., enabling the electronic exchange and legal recognition of trade data and documents between public and private actors located in different countries along the international supply chain. However, such efforts should take place within the context of broader trade facilitation programmes and strategies encompassing trade-related infrastructure and services, particularly those related to port connectivity.
64 Annex 3.1. List of reporting countries and trading partners
Table A3.1. Reporting countries
1. Armenia 24. Ecuador 47. Malawi 70. Senegal
2. Australia 25. Egypt, Arab Rep. 48. Malaysia 71. Singapore
3. Austria 26. El Salvador 49. Maldives 72. Spain
4. Azerbaijan 27. Fiji 50. Mali 73. Sri Lanka
5. Bangladesh 28. Finland 51. Mexico 74. Suriname
6. Barbados 29. France 52. Mongolia 75. Sweden
7. Benin 30. Gambia 53. Myanmar 76. Switzerland
8. Bhutan 31. Germany 54. Namibia 77. Tajikistan
9. Bolivia 32. Ghana 55. Nepal 78. Tanzania
10. Botswana 33. Greece 56. Netherlands 79. Thailand
11. Brazil 34. Guatemala 57. New Zealand 80. Togo
12. Brunei Darussalam 35. Honduras 58. Nicaragua 81. Tonga
13. Burkina Faso 36. India 59. Niger 82. Turkey
14. Cambodia 37. Indonesia 60. Nigeria 83. Uganda
15. Cameroon 38. Japan 61. Pakistan 84. United Arab Emirates
16. Chile 39. Jordan 62. Palau 85. Uruguay
17. China 40. Kazakhstan 63. Papua New Guinea 86. Uzbekistan
18. Colombia 41. Kenya 64. Paraguay 87. Vanuatu
19. Comoros 42. Kyrgyzstan 65. Peru 88. Viet Nam
20. Congo (Republic of.) 43. Lao PDR 66. Philippines 89. Yemen
21. Costa Rica 44. Lebanon 67. Qatar 90. Zimbabwe
22. Cote d'Ivoire 45. Lesotho 68. Republic of Korea 23. Dominican Republic 46. Madagascar 69. Russian Federation Note: Table A3.1 presents the 90 reporting countries used in the empirical models.
65 Table A3.2. Partner countries
1. Afghanistan 42. Cote d'Ivoire 83. Kyrgyzstan 124. Qatar
2. Albania 43. Croatia 84. Lao PDR 125. Republic of Korea
3. Algeria 44. Cyprus 85. Latvia 126. Romania
4. Angola 45. Czech Republic 86. Lebanon 127. Russian Federation
5. Antigua and Barbuda 46. Denmark 87. Lesotho 128. Rwanda
6. Argentina 47. Dominica 88. Lithuania 129. Saudi Arabia
7. Armenia 48. Dominican Republic 89. Luxembourg 130. Senegal
8. Australia 49. Ecuador 90. Macao, China 131. Seychelles
9. Austria 50. Egypt (Arab Rep.) 91. Macedonia, FYR 132. Singapore
10. Azerbaijan 51. El Salvador 92. Madagascar 133. Slovak Republic
11. Bahamas, The 52. Equatorial Guinea 93. Malawi 134. Slovenia
12. Bahrain 53. Estonia 94. Malaysia 135. South Africa
13. Bangladesh 54. Fiji 95. Maldives 136. Spain
14. Barbados 55. Finland 96. Mali 137. Sri Lanka
15. Belarus 56. France 97. Malta 138. St. Kitts and Nevis
16. Belgium 57. Gabon 98. Mauritania 139. St. Lucia
17. Belize 58. Gambia 99. Mauritius 140. Suriname
18. Benin 59. Georgia 100. Mexico 141. Sweden
19. Bhutan 60. Germany 101. Moldova 142. Switzerland
20. Bolivia 61. Ghana 102. Mongolia 143. Syrian Arab Republic
21. Bosnia and Herzegovina 62. Greece 103. Morocco 144. Tajikistan
22. Botswana 63. Grenada 104. Mozambique 145. Tanzania
23. Brazil 64. Guatemala 105. Myanmar 146. Thailand
24. Brunei Darussalam 65. Guinea 106. Namibia 147. Togo
25. Bulgaria 66. Guyana 107. Nepal 148. Tonga
26. Burkina Faso 67. Honduras 108. Netherlands 149. Trinidad and Tobago
27. Burundi 68. Hong Kong, China 109. New Zealand 150. Tunisia
28. Cambodia 69. Hungary 110. Nicaragua 151. Turkey
29. Cameroon 70. Iceland 111. Niger 152. Uganda
30. Canada 71. India 112. Nigeria 153. Ukraine
31. Cape Verde 72. Indonesia 113. Norway 154. United Arab Emirates
32. Central African Republic 73. Iran (Islamic Rep. of) 114. Oman 155. United Kingdom
33. Chad 74. Ireland 115. Pakistan 156. United States
34. Chile 75. Israel 116. Palau 157. Uruguay
35. China 76. Italy 117. Panama 158. Uzbekistan
36. Colombia 77. Jamaica 118. Papua New Guinea 159. Venezuela
37. Comoros 78. Japan 119. Paraguay 160. Viet Nam
38. Congo (Dem. Rep) 79. Jordan 120. Peru 161. Yemen
39. Congo (Rep. of) 80. Kazakhstan 121. Philippines 162. Zambia
40. Cook Islands 81. Kenya 122. Poland
41. Costa Rica 82. Kuwait 123. Portugal
Note: Table A3.2 presents the 162 partner countries used in the empirical models.
66 Table A3.3. Coding and scoring of different stage of implementation
Definition of stage of implementation Coding/
Scoring Full implementation:
The trade facilitation measure implemented is in full compliance with commonly accepted international standards, recommendations and conventions (such as the Revised Kyoto Convention, UN/CEFACT Recommendations, or the WTO Trade Facilitation Agreement). It is implemented in law and in practice. It is available to essentially all relevant stakeholders nationwide, supported by an adequate legal and institutional framework as well as adequate infrastructure, and financial and human resources.
3
Partial implementation:
A measure is considered to be partially implemented if at least one of the following is true: (a) the trade facilitation measure is not in full compliance with commonly accepted international standards, recommendations and conventions; (b) the country is still in the process of rolling out the implementation of measure; (c) the measure is practiced on an unstainable, short-term or ad-hoc basis; (d) the measure is not implemented in all targeted locations (such as key border crossing stations); or (e) not all targeted stakeholders are fully involved.
2
Pilot stage of implementation:
A measure is considered to be at the pilot stage of implementation if, in addition to meeting the general attributes of partial implementation, it is available only to (or at) a very small portion of the intended stakeholder group (location) and/or is being implemented on a trial basis. When a new trade facilitation measure is under pilot stage of implementation, the old measure is often continuously used in parallel to ensure the service is provided in case of disruption of new measure. This stage of implementation also includes relevant rehearsals and preparation for the fully-fledged implementation.
1
Not implemented:
This simply means a trade facilitation measure has not been implemented. However, this stage does not rule out initiatives or efforts towards implementation of the measure. For example, under this stage, (pre)feasibility or planning of implementation can be carried out, and consultation with stakeholders on the implementation may be arranged.
0
Note: Table A3.3 presents coding and scoring of trade facilitation measures in four categories.
67 Table A3.4 Nature and relationships between selected trade facilitation measures considered
and the WTO TFA provisions*
Trade facilitation measure Corresponding WTO TFA Article Binding or non-binding nature of the WTO TFA Article
Institutional arrangement 1. Establishment of a national trade facilitation committee or similar body
Section 3, Article 23: Institutional Arrangements
Binding
31. Cooperation between agencies on the ground at the national level
Section 1, Article 8: Border Agency Cooperation
3. Stakeholder consultation on new draft regulations (prior to their finalization)
Section 1, Article 2: Opportunity to Comment, Information Before Entry into Force, and
notification of new regulation before their implementation relevant trade control agencies’
rulings)
Section 1, Article 4: Procedures for Appeal and Review final determination of customs duties, taxes, fees and charges
Section 1, Article 7.3: Separation of Release from Final Determination of Customs Duties, Taxes, Fees and Charges
Binding
11. Establishment and publication of average release
Section 1, Article 7.6:
Establishment and Publication of
Non-binding
(Phrasing: members are
68
times Average Release Times encouraged)
12. Trade facilitation measures for authorized operators
Section 1, Article 7.7: Trade Facilitation Measures for Authorized Operators
Binding
13. Expedited shipments Section 1, Article 7.7: Expedited Shipments
Binding
14. Acceptance of paper or electronic copies of supporting documents required for import, export or transit formalities.
17. Electronic Single Window System
18. Electronic submission of Customs declarations
N/A
21. Electronic Submission of Air Cargo Manifests
N/A
22. Electronic Application and Issuance of Preferential
Note: Table A3.4 presents justifications for classing WTO TFA measures as binding or non-binding.
*Measures which are binding under the WTO TFA correspond to group one (1) of TF measures in the counterfactual analysis presented in the chapter. Group 2 consists of the measures in group one (1) as well as non-binding WTO TFA measures. All measures, including paperless trade measures, identified as N/A constitute group 3.
69 Annex 3.2. Trade cost reductions from paperless trade facilitation in Asia-Pacific
countries
Figure A3.1. Partial implementation scenario
Figure A3.2. Full implementation scenario
Source: Authors’ calculations.
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0% Bhutan Palau Afghanistan Myanmar Nepal Uzbekistan Cambodia Bangladesh Kazakhstan Mongolia Papua New Guinea Tonga
Fiji Vie
tnam Tajikistan Kyrgyz Republic Lao PDR Armenia Vanuatu Pakistan Sri Lanka Azerbaijan Russian Federation Brunei Maldives Turkey Australia Malaysia China Indonesia New Zealand Japan Korea, Rep. Singapore Thailand India Philippines
Effect from implementation of WTO TFA binding+non-binding+other paperless trade measures (partial implementation)
Effect from implementation of WTO TFA binding+non-binding measures (partial implementation)
Effect from implementation of WTO TFA binding measures (partial implementation)
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0% Bhutan Palau Afghanistan Myanmar Nepal Uzbekistan Bangladesh Cambodia Kazakhstan Mongolia Papua New Guinea Tonga Vietnam
Fiji Kyr
gyz Republic Lao PDR Tajikistan Armenia Vanuatu Pakistan Sri Lanka Azerbaijan Brunei Russian Federation Maldives Turkey Australia India Philippines China Indonesia Malaysia New Zealand Japan Korea, Rep. Singapore Thailand
Effect from implementation of WTO TFA binding+non-binding+other paperless trade measures (full implementation)
Effect from implementation of WTO TFA binding+non-binding measures (full implementation)
Effect from implementation of WTO TFA binding measures (full implementation)
70
Annex 3.3. Literature Review
52The importance of reducing trade costs to support sustained and sustainable development of the Global economy has been widely acknowledged at the policy level, as evidenced by the focus of – and extensive discussions at – the Fifth Global Review on Aid for Trade held in July 2015.53 This is particularly important for developing economies, where trade costs typically remain high and have not fallen as fast as in more developed economies (Arvis et al., 2015).
A wide consensus exists in the literature that further reductions in trade costs will come from addressing non-tariff barriers (NTBs) to trade, including implementation of trade facilitation measures (Duval et al., 2015, among other sources). The importance of reducing not only tariff but also non-tariff barriers to trade is highlighted in a seminal study by Anderson and Van Wincoop (2004), who found that ad-valorem trade costs between countries amounted to a staggering 170%, but that tariff costs only amounted to about 8%. However, measuring the importance and impact of individual non-tariff cost components has remained difficult.54
Building on the inverse gravity approach pioneered by Novy (2013), several studies inferred aggregate trade costs from gross trade and output data, and set out to directly measure the contribution of tariffs and NTBs on such comprehensive trade costs. A first regional analysis in Asia and the Pacific by Duval and Utoktham (2011) found that while tariff costs accounted for 0-10% of trade costs across countries, natural trade costs such as geography (i.e., distance, landlockedness etc.), cultural distance and historical relationships (i.e., language, colonization etc.) between countries accounted for an additional 10%-30% of trade costs (see figure A3.3).
More importantly, policy-related NTBs accounted for the remaining 60%-90% of trade costs. The study found that international trade costs in that broad category were affected by liner shipping (maritime) connectivity, the domestic business environment of the trading partners, the availability and use of ICT services, the direct cost of trade procedures as well as by other policy related factors – the effect of which was difficult to disentangle, given the lack of data.
Figure A3.3. What explains trade costs across countries in Asia and the Pacific?
52 There are two main sources of empirical evidence, which are typically used to demonstrate the benefits of TF:
econometric models and general equilibrium models. The general equilibrium models are more widely used to show the welfare effects of TF, while econometric models generally used to demonstrate the impact of trade policy on trade flows and the cost of trade. Econometric analyses overwhelmingly find that trade facilitation is associated with lower trade costs. However, as Hoekman and Shepherd (2013) pointed out, equivalent conclusions can be drawn from computable general equilibrium models. These models are typically used to analyse the impact on welfare costs across the economy. Baldwin and others (2012) for example found that GVCs enable companies to specialize in activities in which they are competitive; trade facilitation helps companies to exploit these niches by lowering the cost of trade.
53 The theme of the Fifth AfT Global Review was “Reducing Trade Costs for Inclusive, Sustainable Growth”. See https://www.wto.org/english/tratop_e/devel_e/a4t_e/a4tmonit_e.htm.
54 There is considerable difficulty in precisely disaggregating the plethora of individual components that constitute NTBs to trade.As Kee and others (2009) pointed out, previous studies have used a wide range of approaches to measure NTBs. These include frequency and coverage type measures, price comparison measures, quantity impact measures or residuals from gravity regressions.
71
Note: Figure A3.3 is a simplified representation of the results from Duval and Utoktham, 2011.
Arvis and others (2013) extended this type of analysis by developing the ESCAP-World Bank Trade Cost Database and conducting a comprehensive analysis of trade costs across 178 countries. Upon controlling for natural sources of trade costs (i.e., tariffs, transportation, language etc.) and other NTBs earlier identified in the literature, they confirmed the importance of liner shipping connectivity – and logistics performance in general – and the business environment in determining trade costs. Furthermore, the existence of a regional trade agreement (RTA) was shown to significantly reduce trade costs. That later result was corroborated by Novy (2013), who found that the existence of a free trade agreement between trading partners was associated with a 7%-12% decrease in trade costs.
While previous studies have demonstrated that TF can lead to higher trade flows and lower trade costs, very few studies have investigated the impact of the WTO TFA and/or paperless trade upon trade costs. With regards to the WTO TFA, Moïsé and Sorescu (2013) collected data to construct 16 OECD TF Indicators (TFIs) corresponding to the main policy areas covered by the agreement, and estimated the impact on trade costs across WTO member and observer States using the ESCAP-World Bank Trade Cost Database. Their analysis, updated in OECD (2015) based on more recent TFI and trade cost data, suggested that implementation of the TF measures featured in the agreement would bring a 16.5%, 17.4% and 14.6% reduction in trade costs across low-income (LICs), lower-middle income (LMICs) and upper-middle income (UMICs) countries,
Policy Related
72 respectively.55 Measures with the greatest potential for reducing trade costs include harmonizing and simplifying documents (up to 4.2% for LICs), streamlining border procedures (up to 3.9% for LMICs), and automating trade and customs procedures (up to 3.6% for LICs).56 These estimates unfortunately do not take into account the policy-related factors previously identified in the literature as highly significant, such as maritime connectivity and the business environment, possibly leading to overestimation of impact.
With regard to the implementation of paperless trade reforms, the literature is still emerging and evidence of benefits is typically based on case studies and ad hoc evidence.57 On the basis of an APEC survey on paper documents for trade in 1999, DTAC and FTEC (2001) found that removing the mandatory requirements for paper documents would result in savings amounting to 1.5% to 15% of the price of landed goods – depending on the specific product. A more recent study – surveying firms in the Republic of Korea – also found that businesses benefited to the tune of US$ 2.6 billion annually from the introduction of paperless trade; these savings accrued from reductions in labor costs, printing and delivery of documents (Hyundai Research Institute, 2006). In Singapore, the introduction of an electronic Single Window for trade documents reduced processing times from four days to 15 minutes and lowered the cost of submission per document by 71% (UNNExT, 2010). In the case of Japan, the introduction of an electronic Single Window and associated simplified procedures resulted in annual savings exceeding US$ 500 million for an initial investment of about US$ 90 million (UNNExT, 2011).58
Shepherd and Duval (2014) recently reviewed studies related to paperless trade and found that cost reductions associated with implementation of this type of trade facilitation measure ranged from 20% to 87% per transaction across studies and countries. However, the differences in the scope of paperless trade considered as well as in the methodologies applied and data availability limited the comparability of the results across studies. Using data from the ESCAP Survey on Trade Facilitation and Paperless Trade Implementation 2013,59 they found that full implementation of the paperless trade measures included in the survey would result in a 24%
decline in exporting time and 17% reduction in direct export costs across the Asia-Pacific region, increasing the annual export potential of the region by US$ 257 billion.
55 These figures are shown to be 1%-4% lower should countries limit themselves to mandatory provisions only. Trade costs were estimated to decline 11.8% across OECD economies, and 12.6%, 13.7% and 12.8% across low-income, lower-middle income and upper-lower-middle income countries, should those countries limit themselves to mandatory provisions of the WTO TFA (OECD, 2015).
56 The study concluded that the sum of implementing all TF measures outlined in the WTO TFA was greater than the individual components, and advised that TF be implemented comprehensively rather than with a focus on isolated measures.
57 The UNNExT Brief (2009) indicated savings from automation of trade procedures and introduction of electronic Single Windows ranging from US$ 168 million in Hong Kong, China, to US$ 1.5 billion in Thailand and US$ 1.8 billion in the Republic of Korea.
58 It also yielded benefits of US$ 533 million per year, with an implementation cost of US$ 94million.
59 See Wang and Duval, 2014.
73
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